Interactive Investor

Darktrace and THG shares in trouble again

3rd November 2021 14:03

by Graeme Evans from interactive investor

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Selling by major shareholders and doubts about excessive valuations have caused problems for these popular stocks. Graeme Evans explains.

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Profit-taking by a major shareholder at Darktrace (LSE:DARK) today ensured there was no let-up in the City's ruthless dismantling of some of the tech sector's loftiest valuations.

As well as the recent heavy selling at Darktrace, e-commerce player THG (LSE:THG) has lost more than two-thirds of its value this year and digital payments firm Wise LSE:WISE) is down by a quarter in less than a month after its co-founder sold a stake worth £81.5 million.

All three companies have been at the forefront of the drive to promote London as a place where tech-focused stocks can thrive. Their volatile share price performances, however, will leave many retail investors scratching their heads after huge differences in where the shares are currently trading and the price targets of some City analysts.

Darktrace shares were rated at more than 1,000p by at least two brokers last month after the company's first-quarter update showed further strong revenue trends. But they are now closer to 600p after a Peel Hunt note shook sentiment just as the company made its entry into the FTSE 100 index in place of supermarket Morrisons.

The broker slapped a “sell” recommendation and 473p target price on the stock, having argued that there was a disconnect between Darktrace's valuation and the revenue opportunity.

Peel Hunt admitted in a follow-up note yesterday that it had received some pushback from investors over parts of the coverage, but that there was general agreement on most of its points.

The pressure on Darktrace continued today when a private equity firm dumped a third of its holding at the first available opportunity, having been locked in until today under the conditions of the cybersecurity firm's April flotation.

The move at 580p has generated a £36 million profit for Deep Defence, which is part of Vitruvian Partners, as Darktrace shares were priced in the IPO at 250p.

The discounted sale price and fears that other major investors will do the same in the coming days has spooked investors, sending shares down by another 6% today.

Our chart expert Alistair Strang warned recently that a session below 511p could end up with shares travelling down to 268p, which is virtually break-even level for initial investors.

The fall back to earth has been even more spectacular for THG after sentiment towards the Hut Group business was weakened by corporate governance concerns and City scepticism over the worth of its flagship Ingenuity e-commerce platform.

Efforts by chief executive and co-founder Matt Moulding to shore up confidence have so far backfired, with shares continuing to fall despite his capital markets day focusing on Ingenuity prospects and the decision to relinquish his golden share in the business.

Shares in THG peaked at nearly 800p earlier this year but are now well below their 2020 IPO price at 193p. The selling continued this week after BlackRock chose to sell half its holding at a 10% discount of 195p.

Plenty of ii investors think the company is now oversold, given that THG was the third most-bought stock on our platform in October. Analysts at Goldman Sachs and Barclays agree with them after issuing updated price targets of 675p and 660p as recently as last week.

Their recommendations were updated after THG said momentum in its Ingenuity business continued to build during the third quarter, with reported revenue growth of 131% year-on-year and a record number of clients acquired in the period.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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